Gold News

2010's Best Commodity Investments So Far

Gold and silver take the prize for consistency in the first half of 2010...

the best-performing commodity of the second quarter? asks Brad Zigler at Hard Assets Investor.

No, amongst exchange-traded products, it's not a gold trust; the SPDR Gold Trust (GLD), the world's largest Gold ETF, came in third. It's actually the exchange-traded note tracking coffee's price, the iPath DJ-UBS Coffee Subindex Total Return ETN (NYSE Arca: JO).

Surprised? Well, the second quarter was full of surprises for commodity investors. Unfortunately, most of them were unpleasant.

Of 17 single-commodity or narrowly focused products, only four turned a profit. The winners netted an average 12.1 % gain, while the average loser gave up 9.9 %.

We sought out the most liquid single-commodity exchange-traded products to see how well they tracked the spot market over the last three months. And where we couldn't find single-commodity ETPs to represent a sector of the futures market, we used the narrowest instruments; that is, two or three commodities wide.

Overall, ETPs – based upon their last sale prices – did a fair job of tracking spot market commodities. The average apparent return for the 17 ETPs was -4.7 %, while the contemporaneous mean return for the underlying spot commodities was -2.7 %.

But let's run the numbers asset by asset, starting with precious metals...

Spot Gain/Loss
Futures Term Structure
ETP Ticker
ETP Type
ETP Gain/Loss
+/- 200-Day Average
CMX Gold
11.7% Normal GLD TST* 11.7% 8.1%
CMX Silver
6.5% Normal SLV TST 6.2% 5.5%
NYMX Platinum
-8.0% Normal PTM ETN** -7.2% -4.6%
NYMX Palladium
-8.0% Normal PALL TST -7.5% -6.8%

* TST = Grantor Trust
** ETN = Exchange-traded note

Gold Bullion and silver grantor trusts topped the precious metals group in the second quarter, partly because the trusts hold metal and aren't based upon a futures index. Of course, the underlying commodities increased over the period, but the product didn't get in the way of the gain's realization.

In a normal futures market, carrying charges – financing costs, storage charges and insurance fees – build up along the futures term structure to make contracts for deferred delivery more expensive than futures for near-term delivery. This condition, often referred to as contango, is expected when there's ample supply of a storable commodity. An inverted market, on the other hand, exists when deferred deliveries are priced below nearby ones. A dearth of storable supply is usually the culprit.

Normal markets are costly for holders of ETPs based upon long-only futures indexes. In order to maintain exposure to the commodity, futures positions must be rolled forward as contracts approach expiry. In a normal market, that means higher-priced contracts will be purchased with the proceeds from lower-priced futures sales. This incremental loss – or negative roll yield – eats into returns.

That said, the slight disparity in the palladium trust's return vs. spot is a liquidity artifact. The last sale prices reported on the tape don't necessarily reflect the current markets for ETPs. The less actively an ETP trades, the greater the discrepancy between the last sale price and the current bid/offer spread. This should be kept in mind when considering the apparent returns of light-volume exchange-traded notes.

Meantime in base metals...

Commodity Spot Gain/Loss
Futures Term Structure
ETP Ticker
ETP Type
ETP Gain/Loss
+/- 200-Day Average
CMX Copper
-18.0% Normal JJC ETN -19.1% -11.4%
LME Lead
-18.6% Normal LD ETN -18.9% -18.5%
LME Nickel -19.1% Normal JJN ETN -23.5% -8.2%

The market for industrial metals was weak in the second quarter, reflecting the slackened demand for durable goods and housing. The apparent spread between the ETP returns and the spot market is, again, due to timing and contango. While in energy...

Spot Gain/Loss
Futures Term Structure
ETP Ticker
ETP Type
ETP Gain/Loss
+/- 200-Day Average
NYMX Crude Oil -9.6% Normal USO ETF -9.8% -9.8%
NYMX Gasoline
-10.3% Inverted/Normal UGA ETF -5.8% -5.8%
NYMX Heating Oil -2.9% Normal UHN ETF -6.0% -6.0%
NYMX Natural Gas
-19.8% Normal UNG ETF 12.2% -8.7%

Natural gas turned in the standout performance in the energy category, though deep contango in the futures term structure ate up a lot of the spot market gain. Carrying charges seemed to have also reduced the returns for the heating oil and crude oil exchange-trade funds. The large disparity between the gasoline ETF's return and its spot market is due to gasoline's unstable term structure over the second quarter.

And over in the agricultural funds...

Spot Gain/Loss
Futures Term Structure
ETP Ticker
ETP Type
ETP Gain/Loss
+/- 200-Day Average
ICE Coffee
21.5% Normal/Inverted JO ETN -18.5% 17.1%
ICE Cocoa
-0.4% Normal NIB ETN -1.2% -4.9%
ICE Cotton -5.1% Inverted/Normal BAL ETN -3.0% -0.2%
ICE Sugar
-3.3% Inverted/Normal SGG ETN -7.0% -23.4%
CBOT Corn, Wheat, Soybeans
0.7%* Normal/Inverted JJG ETN -0.7% -6.1%
CME Live Cattle, Lean Hogs
-0.3%* Normal/Inverted COW ETN -3.4% -0.8%

* Spot returns are composites weighted by the constituent commodities' ETP allocations.

Among the softs, grains and livestock, coffee was the clear winner. Still, soft ETNs are lightly traded, so the differences between the products' apparent returns and their underlying markets can seem large. While grain prices broke to the upside – in particular, corn and wheat, jumping on the last day of the quarter following US Department of Agriculture reports of lighter-than-expected plantings – livestock prices spent most of the quarter backing off from the parabolic run-ups of the previous year.

The final tally? In the first quarter, 75% of single-commodity and narrowly focused ETPs were winners. The platinum and palladium products were the top performers, along with the livestock ETN. But in the second quarter, the situation reversed: Losers outnumbered winners by better than 3-to-1. Coffee led the way in the second quarter, followed by natural gas.

The worst performers in the year's second stanza were the industrial metals – lead, copper and nickel. In the first quarter, sugar, natural gas and grains brought up the rear. And overall, while there's been jockeying for best and worst honors, gold and silver take the prize for consistency in the first half of 2010.

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